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M8: Liabilities

M8: Liabilities. A=L+OE Liabilities—all probable & estimable AP—Suppliers, AP Turnover (CGS/avg AP), Leaning on the Trade Accrued—Employees, interest, warranties… Possible INCOME misstatements (ethics) Big Bath. Financial Obligations Notes Payable—often from banks Bonds Payable—covenants

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M8: Liabilities

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  1. M8: Liabilities • A=L+OE • Liabilities—all probable & estimable • AP—Suppliers, AP Turnover (CGS/avg AP), Leaning on the Trade • Accrued—Employees, interest, warranties… • Possible INCOME misstatements (ethics) • Big Bath

  2. Financial Obligations • Notes Payable—often from banks • Bonds Payable—covenants • Discount—recog. interest > face • Premium—recog. interest<face • Gain/loss on repurchase • Credit ratings—Moody’s, S&P, Fitch • Business/Financial risks • liquidity, solvency, earnings

  3. M9: Owners’ Financing • Preferred Stock—dividends, liquidation, restrictions on management • Often issued in acquisitions • Equity Carve-outs • Sell-off—sell for cash • Spin-off—issue shares of sub as dividend • Split-off—trade shares for common stock • Convertible debt/preferred stock—dilutes owners’ upside • Foreign currency—gains or losses as US currency losses or gains value—report in “Other comp. Income” in owners’ equity section

  4. M14: Costs • Cost behavior—fixed, variable, mixed, step • FC can be committed (depreciation) or discretionary (advertising) • Cost estimation: FC+VC*Units • VC=Dif. in Costs/Dif. In Units • FC=Total Costs – VC*Units • Cost terms • Production: unit, batch, product, facility • Customer: units, order, customer, market

  5. M15: CVP Analysis CVP is used to determine for a given volume the costs, revenues, and profits Assumptions: Fixed/Variable costs (linear), relevant range, constant mix or single product, single volume measure

  6. Difference in income statements used: Rev-VC=CM-FC=IBT BE=FC/CMU, Q=(FC+RI)/CMU Before Taxes: After Tax/(1-Tax Rate) Operating Leverage: CM/IBT Margin of Safety Ratio: (EV-BE)/EV

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